*EPF207 03/20/01
Text: Federal Reserve Cuts Key Interest Rates by Half Point
(Statement cites stock price declines, overcapacity) (500)

Citing concerns about economic weakness, the Federal Reserve has acted to lower both the short-term increase rates it controls by half a percentage point.

The policy-making Federal Open Market Committee (FOMC) voted March 20 to lower the Federal Reserve's target for the federal funds rate -- what banks charge each other for overnight loans -- to 5 percent from 5.5 percent. This is the third consecutive half point rate reduction since January 3. The Federal Reserve also approved a half point lowering of the discount rate to 4.5 percent. This is the rate the Federal Reserve charges for its daily loans to private banks and other financial institutions. The two rates are the Federal Reserve's most visible tools in its conduct of monetary policy to influence the U.S. economy. The federal funds rate is the more important of the two.

The FOMC statement issued after the meeting cited concerns that pressures on profit margins were restraining investment spending while declines in "equity wealth" were reducing consumption. The statement said that spending had "firmed a bit since last year" and that adjustments in inventories "appeared to be well underway."

Excess production capacity has emerged as a matter of concern, the statement said. "The possibility that this excess could continue for some time and the potential for weakness in global economic conditions suggests substantial risks that demand and production could remain soft," it said.

The next FOMC meeting is on May 15. The FOMC meets eight times a year.

Following is the text of the Federal Reserve's statement:

(begin text)

Federal Reserve Board
March 20, 2001

The Federal Open Market Committee at its meeting today decided to lower its target for the federal funds rate by 50 basis points to 5 percent. In a related action, the Board of Governors approved a 50 basis point reduction in the discount rate to 4-1/2 percent.

Persistent pressures on profit margins are restraining investment spending and, through declines in equity wealth, consumption. The associated backup in inventories has induced a rapid response in manufacturing output and, with spending having firmed a bit since last year, inventory adjustment appears to be well underway.

Although current developments do not appear to have materially diminished the prospects for long-term growth in productivity, excess productive capacity has emerged recently. The possibility that this excess could continue for some time and the potential for weakness in global economic conditions suggest substantial risks that demand and production could remain soft. In these circumstances, when the economic situation could be evolving rapidly, the Federal Reserve will need to monitor developments closely.

The Committee continues to believe that against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future.

In taking the discount rate action, the Federal Reserve Board approved requests submitted by the Boards of Directors of all twelve Reserve Banks.

(end text)

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